There will be further serious concerns over the government debt position, especially with fears that the borrowing estimates will be revised higher in the pre-budget report due on Wednesday. There is also likely to be renewed speculation over a credit-rating downgrade. Sterling will gain some degree of protection from an underlying improvement in global risk appetite. For now, Sterling losses are liable to be limited to 1.6280 against the dollar with pressure for at least a limited correction stronger after recent losses, but 1.6055 is a realistic target for later this week.
The UK currency had a sharply weaker tone following the US payroll data on Friday. Sterling dipped to lows near1.6420 against the US currency in New York, but was robust against the Euro and strengthened to near 0.90 in US trading.
Sterling moves will continue to be influenced by trends in risk appetite and Sterling gained some net support following the US data as international risk appetite was firmer. There were also reported merger-related Sterling purchases.
There are still very important domestic vulnerabilities and government debt issues will be brought into even greater focus by the pre-budget report which is due to be delivered on Wednesday. There will be speculation that the government will be forced to increase its borrowing estimates. There is also likely to be fresh speculation of a credit-rating downgrade following the report. These debt fears will tend to limit the scope for Sterling support given. From the 1.6510 area, Sterling retreated to 1.6315 as the dollar gained renewed support.